Free Credit Scores: Help or Hindrance?

Remember how hard it used to be to see your credit score? Now it’s easy.

Gone are the days when the credit industry guarded this all-important number — despite the fact it’s your number — as if it was the recipe for Coke. Free credit scores are offered in lots of places now, and so you’d think the problem of knowing your credit score would be solved.

So many scores

… a numerical “grade” produced when the information on a credit report is run through a computer model, and lenders use them to judge creditworthiness of loan applicants. Borrowers with high scores typically are offered loans at lower interest rates.

We consumers get the idea there’s one score on which our credit is judged. FICO, the company that invented the credit-scoring model, says its score is used in 90 percent of lending decisions.

But there are a number of scores from various companies and for various purposes. Therein lies the confusion. For instance, there are scores customized for mortgage lenders, car dealers, credit card issuers and many others.

Free non-FICO scores

… use VantageScore, developed by credit rating bureaus Experian, Equifax and TransUnion. Still others compute scores by working with a single credit bureau. FICO and TransUnion’s New Account Score ranges from 300 to 850; Vantage, from 501 to 990; Equifax’s is between 280 and 850 and Experian’s is 330 to 830.

Here are some websites that offer free non-FICO credit scores. Their scores do, however, use the same 300-850 score range as FICO and are constructed similarly:

Credit Sesame

Credit Karma

Credit.com

Quizzle

Free FICO scores

It’s harder to get a free FICO score, though not impossible. Companies — banks and credit card issuers, mainly — can purchase consumer credit scores for free distribution to their customers from FICO’s Score Open Access program. These may be general FICO scores or scores modeled by FICO for a specific purpose, like credit card lending.

FICO provides the formula and software for calculation of its namesake scores, which are produced by the three major credit bureaus (Experian, Equifax and TransUnion) based on their consumer credit files. While there are competing credit scores that use different formulas, FICO says its scores are the most widely used by lenders.

FICO’s marketing pitch to these companies says Score Open Access “enables you to share the FICO Score you use to help make risk management decisions.”

These companies offer FICO Score Open Access to customers:

Discover and Barclaycard U.S. cardholders can see FICO scores from TransUnion that describe their general credit risk.

FirstBankcard offers a FICO score from Experian that shows a customer’s risk as viewed by credit card issuers.

U.S. Bank customers signing up through online banking can obtain a general-risk FICO score from Experian.

Capital One customers get a free TransUnion Education Score, a general-risk score.

Fries with that?

What’s next? A free credit score with your burger and fries? The plethora of scores and the differences among them can be bewildering. Just look at the experience of Money Talks News’ Stacy Johnson. He pulled his credit scores from three sources — two of them from free online services and the third from FICO. Here are his scores:

Credit.com (free) — 830.

Credit Karma (free) — 740.

FICO credit score ($20) — 844.

As Stacy’s experience indicates, if you signed up for all of these offerings, you might get a different score from each, with a range of more than 100 points between the lowest and highest scores.

Does the number really matter?

With such a wide range possible, why should you pay attention?

You should because your FICO score affects whether you’re offered credit for everything from car and home purchases to credit cards, as well as the interest rate you’ll get.

People with lower FICO scores pay more, as this chart from FICO shows. For example, for a 30-year fixed-rate mortgage, a borrower with a credit score in the 620-639 range could pay 1.5 percentage points more than someone with a score in the 760-850 range.

Ouch! On a $300,000 mortgage, that’s $285 a month more for the very same loan — just for having poor credit.

That’s not all. The price of your car insurance and life insurance may depend in part on your credit history. Some landlords pull credit reports and FICO scores when choosing tenants, and some employers check credit reports before hiring.

How to use these free scores

Free credit scores are useful indicators of success, trouble, or of something that needs attention. You can cut through the numbers confusion and take advantage of free scores by focusing on:

The score’s accuracy.

The score’s movement up or down.

Pull your score on a regular basis — once or twice a year — to watch for changes. (Get it from the same source each time, for an apples-to-apples comparison). As you work to pay down credit card debt and establish better credit, it’s great to watch your score improve.

A more important thing to watch

Really, the more important source to watch is your credit report. Your credit scores are based on your credit reports — a record of how you use credit compiled from lenders and other businesses you deal with. These reports are compiled by the three major credit reporting agencies.

A dropping score can be a sign of many things — that you need to pay your bills on time, for instance, or that you should use less of your available credit. Or it may be a sign the credit agency has incorrect information, which you can and should correct.

The law gives you the right to get three free credit reports each year. Spread them out throughout the year and get one from each credit reporting agency to keep tabs on your credit. Here’s how to get yours. And here’s a tip: Be careful where you get that free credit report. Only one site — AnnualCreditReport.com — is the government-authorized source of free credit reports.

Financial solutions for seniors:

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